April 14, 2013

I’ve been spending too much time recently thinking about the financial transaction tax (FTT), the proposal for which is rumbling through the Brussels process under the enhanced cooperation rule. What the latter means is that at least nine member states must be behind a proposal for it to be implemented. At present there are 11 and one of the interesting points to muse on is whether there could actually be at least three member state defections. Metaphors about rats and sinking ships might spring to mind but they would be inappropriate.

I am suffering quite strong pangs of déjà vu, having looked back at the testimony I gave to ECON in the European Parliament in February 2012. The arguments I tried to make then are now being much more widely heard. I suggested that this was a taxation proposal that falls wide of the mark, in that the economic burden will in fact be borne by consumers and the real economy rather than the banks. I was at pains to stress that the core political objective, which then as now is to recover for the taxpayer some of the cost of bailing out the financial system, is one that I and almost everybody must consider reasonable and right. The only problem of course is that the tax fails to make the banks pay. This is all very reminiscent of the much more recent realisation that bail-in has to be a necessary part of saving banks.

Tomorrow evening I’ll be participating in a seminar in Brussels to discuss FTT. Unlike my appearance at the European Parliament, when I was surrounded by so much political hostility that I seemed to be in a minority of one, the audience tomorrow should be much more friendly: it is largely made up of representatives of member states that are not FTT enthusiasts. The even better news is that Germany (an FTT supporter) is to be well represented, which is encouraging as that member state must surely be one where common-sense could still prevail (if the little local difficulty of impending elections can be overcome).

Pondering the FTT issues, one nuance rather amuses me and I thought it worth recording.

The political grandstanding around FTT makes the argument about payback from the banks to recompense taxpayer costs. A laudable objective and as implied above, one that I essentially support. All except the banks will pay for FTT and in practice this means all of us, including our pension funds. Do I exaggerate? Maybe just a little, but surely neither the banks’ shareholders nor their employees (through salary and bonus) will carry the cost of the tax.

Amidst all the fire and brimstone associated with political debate about FTT, what the politicians have chosen to overlook is what is arguably a much more serious aspect of the banking system. That is that much of the economic behaviour of banks looks distinctly oligopolistic. I’m sure that most individuals would agree that they are subject to a less than truly competitive market in their dealings with banks. And companies too most often feel that their broader business relationships with banks – whilst often valued and supportive – are perhaps characterised by a lack of true competition. Less self-evident perhaps during those glory days when markets such as London were absurdly over-banked.

A further nuance in this situation is that if the FTT proposal is implemented, it will surely do considerable damage to the business models of FTT zone banks, as well as potentially to all banks within the European Union. So far from implementing a strongly based taxation model that will generate the recompense sought by the politicians, the outcome could be a tax carried by the banks’ customers, enfeebled EU banks and a stimulus to the rest of the world watching with considerable glee as a purely political agenda is pursued here in Europe.